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Sovereign yields and the risk-taking channel of currency appreciation

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  • Boris Hofmann
  • Ilhyock Shim
  • Hyun Song Shin

Abstract

Currency appreciation goes hand in hand with easier financial conditions and compressed sovereign bond spreads, even for local currency sovereign bonds. This yield compression comes from a reduction in the credit risk premium. Crucially, the relevant exchange rate involved in yield compression is the bilateral dollar exchange rate, not the trade-weighted exchange rate. Our findings point to a financial risk-taking channel of currency appreciation associated with the global role of the dollar.

Suggested Citation

  • Boris Hofmann & Ilhyock Shim & Hyun Song Shin, 2016. "Sovereign yields and the risk-taking channel of currency appreciation," BIS Working Papers 538, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:538
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    Keywords

    bond spread; capital flow; credit risk; emerging market; exchange rate;
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